Professional Documents
Culture Documents
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of Customs, reported in 2002 NTN (Vol. 20) 73; (2001) 4 SCC, 593 Apex
Court doubted the conclusion arrived at in the case of Rainbow Colour
Lab vs. State of M.P., (Supra) and has held that the same is contrary to
the provisions contained in Article 366 (29-A) and also to the
Constitution Bench decision of the Apex Court in the case of Builders
Association of India vs. Union of India (Surpa).
In the case of C.K. Jidheesh vs. Union of India, reported in 2005 (8)
SCALE, 784 Apex Court held that the observation in the case of
Associated Cement Companies Ltd. referred
Here in above were obiter and the judgment in the case of Rainbow
Colour Lab (Supra) was still good law.
The aforesaid decisions have been considered by the Apex Court
in the case of Bharat Sanchar Nigam Limited Vs. Union of India (Supra).
Apex Court held that after the 46th Constitutional Amendment the
sale element of those contracts
Which are covered by the six sub-clauses of clause (29-A) of Article
366 are separable and may be subjected to sales tax by the States
under Entry 54 of List II and there is no question of the dominent
nature test applying. The decision in the case of Rainbow Colour Lab
(Supra) and C.K. Jidheesh vs. Union of India (Supra) has been held not
correct. The dominent object in a contract is held to be not relevant
and the value of the goods involved in a contract is held liable to tax
under Article 366 (29A) of the Constitution of India.
Under the transfer of right to use the goods, the leasing
transactions are liable to tax.
Clause (d) of Article 366 (29-A), which is clause (a) of Section 3-F (1) of
the Act came up for consideration before the Constitution Bench of
the Apex Court in the case of 20th Century Finance Corporation Ltd. vs.
State of Maharashtra, reported in 2000 NTN (Vol. 16) 425; 2000 UPTC,
593, the Apex Court held as follows:
“As a result of the aforesaid discussion our conclusions are these:
(a) The States in exercise of power under Entry 54 of List II read
with Article 366 (29-A) (d) are not competent to levy sales tax on
the transfer of right to use goods, which is deemed sale, if such
sale takes place outside the State or is a sale in the course of
inter-State trade or Commerce or is a sale in the course of import
or export.
(b) The appropriate Legislature by creating Legal fiction can fix situs
of sale. In the. Absence of any such legal fiction the situs of sale
in case of the transaction of transfer of right to use any goods
would be the place where the property in goods passes, i.e. where
the written agreement transferring the right to use is executed.
(c) Where the goods are available for the transfer of right to use the
taxable event on the transfer of right to use any goods is on the
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transfer which results in the right to use and the situs of sale
would be the place where the contract is executed and not where
the goods are located for use.
(d) In cases where goods are not in existence or where there is an
oral or implied transfer of the right to use goods, such
transactions may be effected by the delivery of the goods. In such
cases the taxable event would be on the delivery of goods.
(e) The transaction of transfer of right to use goods cannot be termed
as contract of bailment as it is deemed sale within the meaning
of legal fiction engrafted in Clause (29-A) (d) of Article 366 of the
Constitution where the location or delivery of goods to put to use
is immaterial. “
After laying down the aforesaid law, the Apex Court examined
the provision of respective State relating to the transfer of right to use
the goods. The provisions of Section 2 (h) and Section 3-F of the Act
have also been examined. The Apex Court held as follows:
“The aforesaid provisions shows that so far as the inter-State
sales are concerned, in substance are not taxable, but no
provision has been made for declared goods. Yet, there is another
aspect. By virtue of Clause (ii) of Explanation 1 to Section 2 (h),
the ambit of sale has been widen by including ’Outside sale’ as
'inside sale' on mere location of goods for use within the state
irrespective of the fact that the agreement for transfer of right to
use has been executed out side the state or whether the sale is
outside the State, the tax is chargeable within the State. And,
further, on account of a special provision for rates of tax, the
other provision such as single Point tax as well as exemption
etc. is not Applicable to the transaction of transfer of right to use
any goods. We find that Clause (ii) of Explanation I of Section 2
(h) is in excess of legislative power under Entry 54, List-II of
Seventh Schedule and, therefore, we direct that Clause (ii) of
Explanation I of Section 2 (h) of the Act shall be read down to this
effect that it would not be applicable to the transaction of transfer
of right to use any goods if such deemed sale is (i) an outside
sale, (ii) sale in course of the import of the goods into or export of
the goods out of the territory of India and (iii) an inter State sale.”
From the law laid down as above, it emerges that the State has
no jurisdiction to levy the tax on such deemed sale if such sale take
place outside the State or in the course of inter-State trade or commerce
or in the case of import or export; the legislature by creating fiction
can fix situs of sale in the absence of such legal fiction the situs would
be a place where the written agreement transferring the right to use
is executed; where the goods are available for the transfer of right to
use the taxable event on the transfer of right to use any goods is on
the transfer which results in right to use and the situs of sale would
be the place where the contract is executed and not where the goods
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are located for use; in case where the goods are not in existence or
where there is an oral or implied transfer of right to use the goods,
such transactions may be effected by the delivery of the goods and in
such cases the taxable event would be on the delivery of the goods.
Clause (ii) of Explanation-I of Section 2 (h) of the Act is to be read
down to the effect that it would not be applicable to the transaction of
transfer of right to use any goods, if such deemed sale is (i) an outside
sale, (ii) sale in course of the import of the goods into or export of the
goods out of the territory of India and (iii) an inter-State sale.
In the case of 20th Century Finance Corporation Ltd.vs State of
Maharashtra (Supra) Apex court has categorically held That the
appropriate Legislature by creating fiction can fix situs of sale and in
the absence of such legal fiction the situs would be a place where the
property in goods passes, i.e. written agreement right to use the goods
executed.
In the case of M/s Goa Carobn Limited, Goa vs. CTT, reported in
2006 NTN (Vol.), 448. Following the decision of the Constitution Bench
of the Apex Court, Allahabad High Court has held that the fiction under
the U.P. Trade Tax Act by clause (2) of Explanation I of section 2(h) of
U.P. Trade Tax Act fixing the situs of sale in the State where the goods
are used, notwithstanding that the agreement for lease has been
entered into outside the State, is valid. The place of execution of the
agreement has been held irrelevant.
Apex Court further held that Clause (ii) of Explanation-I of Section
2(h) of U.P. Trade Tax Act is to be read down to the effect that it would
not be applicable to the transaction of transfer of right to use any goods,
if such deemed sale is (i) an outside sale, (ii) sale in course of the
import of the goods into or export of the goods out of the territory of
India and (iii) an inter-State sale. Thus, the inter-State transactions
can not be subjected to tax under the transfer of right to use the goods.
The principle laid down by the Apex Court has to be applied on the facts
of the case.
In the case of Bharat Sanchar Nigam Ltd. & another Versus Union
of India & others (Supra), the decision of the Apex Court in the case of
20th Century Finance Corporation Ltd and another Versus State of
Maharashtra (supra) came up for consideration. The quarrel was with
regard to the
Observation of the Apex Court namely, “In our view, therefore, on
a plain reading of sub-section (d) of Clause (29-A) the taxable event is
transfer of right to use the goods regardless to say whether the goods are
delivered for use, what is required is that should be in existence so that
they may be used.” In view of the aforesaid observation, the State was
of the view that for the transfer of right to use the goods possession/
delivery of the goods was not necessary. This aspect of the matter has
been examined by the Apex Court in the case of Bharat Sanchar Nigam
Ltd. & another. Versus Union of India & others (supra).
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Apex Court explained the above observation in the case of 20th
Century Finance Corporation Ltd. vs. State of Maharashtra (Supra) and
held as follows:
In our opinion, the essence of the right under Article 366 (29A)
(d) is that it relates to user of goods. It may be that the
Actual delivery of the goods is not necessary for effecting
the transfer of the right to use the goods but the goods must be
available at the time of transfer must be deliverable and delivered
at some state. It is assumed. at the time of execution of any
agreement to transfer the right to use. That the goods are available
and deliverable. If the goods. Or what is claimed to be goods by the
respondents. are not deliverable at all by the service providers to
the subscribers” the Question of the right to use those goods” would
not arise.
In the same judgment, Hon’ble Dr.A.R.Lakshamanan, J.
further held as follows :
(a) The transferee should have a legal right to use the goods
consequently all legal consequences of such use including any
permissions or licenses required therefore should be available
to the transferee;
(b) for the period during which the transferee has such legal right it
has to be the exclusion to the transferor this is the necessary
concomitant of the plain language of the statute viz a "transfer
of the right to use" and not merely a licence to use the goods,
Thus for being a transfer of right to use the goods the goods must
be deliverable and should be delivered at some stage thus delivery of
the goods at some stage is a condition precedent for the transfer of
right to use the goods .
There are lot to say on the subject but due to my limitations it
may not be possible for me to express any opinion on the controversial
issues
In the end , I once again express my gratitude to the organizer of
conference for inviting me and giving me an opportunity to speak few
words.
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